Global Markets End August Cautiously as Oil Rises and Bond Yields Climb

By COMFORT OGBONNA

Global stock markets were set to close August on a cautious note Monday as renewed fighting between the United States and Iran pushed oil prices higher and government bond yields in major economies climbed to multi-year highs.

The latest escalation in tensions in the Middle East added to concerns about the outlook for global inflation and raised the possibility that major central banks could keep interest rates higher for longer or resume monetary tightening.

Oil prices rose about 2%, with Brent crude trading above $90 a barrel after U.S. forces struck two Iranian launchers on Larak Island on Sunday. Iran subsequently attacked U.S. forces stationed in Jordan and said it had struck a tanker in the Strait of Hormuz.

U.S. President Donald Trump later said in a social media post that Kharg Island, Iran’s main oil export terminal, was being heavily attacked. There was no immediate independent military confirmation of the claim.

The renewed conflict has placed the Strait of Hormuz and other critical energy infrastructure back at the center of market concerns. Any prolonged disruption to oil shipments through the region could tighten global supplies and place further upward pressure on energy prices.

Higher oil prices are particularly important for central banks because energy costs can feed into consumer prices and make it more difficult for inflation to return to policymakers’ targets.

Markets have already been reassessing the outlook for U.S. interest rates following Federal Reserve Chair Kevin Warsh’s hawkish comments at the Jackson Hole economic symposium on Friday.

Investors increased their expectations for a September rate increase, with market pricing indicating about a 57% probability of a hike. The shift pushed short-term U.S. Treasury yields sharply higher and contributed to a flattening of the yield curve.

Some economists continued to expect the Federal Reserve to wait until December before raising rates, but acknowledged that the September meeting could result in a policy change depending on incoming economic data.

The prospect of higher interest rates has also strengthened expectations that monetary policy could remain restrictive across several major economies.

Barclays now expects the Federal Reserve to raise its benchmark interest rate by 25 basis points in both September and December, after previously forecasting that rates would remain unchanged for the rest of the year.

European markets also opened slightly lower Monday. The STOXX 600 index edged down in early trading, with activity reduced by a public holiday in Britain. U.S. stock futures were little changed to slightly weaker.

In Asia, Japan’s Nikkei index slipped 0.1%, while the MSCI global stock index was marginally lower.

Bond markets remained under pressure as investors reassessed inflation and interest-rate risks. Japan’s two-year government bond yield rose to a 31-year high, while Germany’s two-year yield reached its highest level since July 2024.

Japanese longer-term government bonds also weakened, with the 10-year yield again reaching its highest level since 1996.

The moves in Japan’s bond market came after a sharp selloff in U.S. Treasuries on Friday. The yield on the two-year U.S. Treasury note stood around 4.34% after rising nearly 12 basis points in the previous session.

The 30-year Treasury yield was more stable at about 5.20%, with investors finding some reassurance in the Federal Reserve’s renewed emphasis on controlling inflation.

Japan’s financial markets are also being closely watched because of renewed weakness in the yen.

The dollar was recently trading around 159.56 yen, down roughly 0.25% on the day, after the Japanese currency again moved beyond the psychologically important 160-yen-per-dollar level.

U.S. Treasury Secretary Scott Bessent said the yen’s recent decline remained relatively contained, reducing immediate concerns that authorities would need to intervene jointly to support the currency.

Japan’s government and central bank have faced growing pressure to address the yen’s weakness, particularly as a weaker currency can increase the cost of imported energy and other goods and potentially add to domestic inflation.

China’s markets were more mixed. Chinese blue-chip stocks recovered from earlier losses, although property developers remained under pressure following new regulatory changes aimed at the struggling property sector.

Official data showed China’s manufacturing activity improved in August, with the purchasing managers’ index rising to 49.8 from 49.2 in July. A reading below 50 still indicates contraction, suggesting that the manufacturing sector remained under pressure despite the improvement.

Services activity was also subdued, highlighting the uneven nature of China’s economic recovery.

Investors are now turning their attention to several major economic indicators that could influence central bank decisions in the coming weeks.

The U.S. August employment report due later this week is expected to be particularly important for the Federal Reserve. Economists expect payrolls to increase by about 58,000 following a decline of 23,000 in July, while the unemployment rate is expected to remain at 4.1%.

A substantially weaker employment report could alter expectations for a September rate increase, although markets would likely need to see a significant deterioration in labor-market conditions to completely remove the possibility of a hike.

Consumer inflation data due Sept. 11 will also be closely watched as policymakers assess whether price pressures are continuing to ease.

Inflation and monetary policy are expected to remain major topics when finance ministers and central bank officials from the Group of 20 economies meet in North Carolina on Monday and Tuesday.

New Zealand’s central bank is also expected to raise interest rates for a second consecutive meeting on Wednesday as officials attempt to contain inflation.

The Bank of Canada, meanwhile, is widely expected to leave interest rates unchanged as policymakers assess the economic effects of an ongoing trade dispute with the United States.

In Europe, investors are awaiting inflation data that could reinforce expectations for another interest-rate increase from the European Central Bank in September.

Currency and bond markets are likely to remain sensitive to incoming inflation data as investors attempt to determine whether major central banks are approaching the end of their tightening cycles or may need to maintain pressure on borrowing costs.

Gold prices fell about 0.3% to roughly $4,437 an ounce on Monday after declining 3.2% on Friday as bond yields jumped.

Despite the recent decline, gold has gained approximately 10% during August, putting the precious metal on track for its strongest monthly increase since January.

The combination of higher oil prices, elevated bond yields, renewed geopolitical tensions and uncertainty over the path of global interest rates is leaving investors cautious as August comes to an end.

Markets are now entering September with monetary policy, inflation and developments in the Middle East likely to remain among the most important factors determining the direction of global asset prices.